Where the Hell is My Money?! The Dirty Secrets of ACH
The question that we get asked most often is – where is my money? We have a support article that touches on the number of days our payment process takes, but it doesn’t really talk about the why. We use a system called Automated Clearing House (ACH) to help companies reimburse their employees expenses. So, I set out on a mission to learn the intricacies of ACH in order to shed some light on this question.
If you aren’t quite sure what ACH payments are, you can think of the direct deposit for your payroll or using a service like PayPal to send money to someone from your bank account. It’s how you transfer money from one bank account to another without writing a check. The system was created in the 1970’s and was meant to help alleviate the number of paper checks a bank needed to process each day.
An example of ACH
Walking through an use case for ACH, an example would be if ABC Corp wanted to reimburse its employee Sarah a $100. ABC Corp uses Silicon Valley Bank for a corporate bank account and Abacus to manage reimbursements, and Sarah uses a local credit union.
- ABC Corp approves an $100 expense in Abacus for Sarah.
- Abacus uses their bank, Wells Fargo, to send instructions to debit $100 from ABC Corp’s Silicon Valley Bank account.
- The instructions go to the Federal Reserve (the clearing house) who passes it along to Silicon Valley Bank.
- The funds then show up in a holding account at Wells Fargo.
- Silicon Valley Bank has 2* days to reject the transfer (Intuit posted the full list of rejection / reversal reasons here)
- No confirmation is sent from Silicon Valley Bank that everything is OK, so step 6 is just about waiting out the two day window.
- A second set of ACH instructions is then sent from Wells Fargo through the Federal Reserve to Sarah’s local credit union that $100 is to be deposited into Sarah’s bank account.
Start to finish, the example for this ACH process usually takes between 4 and 5 business days. Gusto did a really great job in their 4 part blog series explaining the technical mechanics behind the ACH process if you want to dig further into the specifics of the “how.”
But I still didn’t feel like I was getting a solid answer on exactly how long it takes to move the funds… usually takes… between 4 and 5 days… those aren’t definitive.
So I continued to dig. I scoured the book of rules from NACHA (National Automated Clearing House Association – these guys literally wrote the book on ACH) which is two inches thick, yet I still couldn’t find a concrete answer.
Knowing this was over my head, I asked our CTO – “Okay Josh, so where exactly is the money at each point in the process?” His response – there is no money.
Ummm…. what? I felt like Neo in The Matrix realizing that there is no spoon.
But in reality, when doing an ACH transfer, it’s not black and white. There isn’t a person at the other end picking up a bag of cash and bringing it to another bank to complete your transfer. It’s like a digital series of instructions and record keeping by each bank and the Federal Reserve.
What does this have to do with the time schedule?
When someone hands you a bag of money, you know that they had it to give to you. You know that you have it now to spend. It’s pretty black and white. It’s tangible.
ACH is more like telling someone they have the money to spend unless they are told otherwise at some point over the next two days. Most people won’t spend the money in case they need to give it back, and since there is no actual confirmation, you are only left to assume that you can spend it when the waiting period is up.
So why the two day window? Each bank has it’s own way of keeping and reviewing records – some faster and more sophisticated than others. In order to make it possible to move money to and from any bank in the United States, the NACHA rules are built to accommodate the smallest, slowest bank. Some banks still use a human element or have limited resources and that slows down the process for everyone. NACHA rules have to give everyone a chance to review the transactions and raise the red flag to ask for their money back.
But why the difference between 4 OR 5 days?
This is mostly a matter of timing. Some vendors and banks have cut off times for sending batches of ACH instructions to the Federal Reserve and most only process ACH during normal business hours – not during bank holidays or weekends. At Abacus, our cutoff times to process ACH is 6pm EST Monday through Friday, and not on banking holidays – which means that any expense approved before 6pm, the ACH will get sent that night. So the difference between 4 and 5 days is based on lining up the timing of each part of the process across all of the institutions involved.
Long and the short? Until the magical day when banks are all operating on the same wavelength, we’re stuck between 4 and 5 days to process ACH. The light at the end of the tunnel is the same day ACH that the industry is trying to move towards. According to NACHA:
“[Same Day ACH] will build upon existing, next-day ACH Network capabilities and establish a new option for same-day clearing and settlement via ACH. Under the Rule, two new same-day settlement windows will be added to the ACH Network, increasing the movement of funds between financial institutions from once each day to three times each day. The Rule also requires that all Receiving Depository Financial Institutions (RDFIs) receive same-day transactions and provide faster funds availability to customers, creating value for end uses through its reach to all bank accounts and ability to give consumers and businesses a new option to quickly pay bills and receive funds faster.”
Moving towards same day ACH is scheduled to start in September 2016.